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Behind the Numbers: PCE Inflation Update, May 2017

This update, prepared by Dallas Fed Senior Economist Jim Dolmas, provides an in-depth analysis of the latest personal consumption expenditures (PCE) inflation data. Updates will be posted monthly, following the release of the official PCE data by the Bureau of Economic Analysis. NOTE: Terms in bold are defined in the Inflation Update Glossary.

The headline, or all-items, PCE price index fell at a 0.8 percent annualized rate in May after rising at a 2.1 percent annualized rate in April. The price index for PCE excluding food and energy rose at a 0.8 percent annualized rate, with prices for core goods falling at a 2.6 percent annualized rate, and prices for core services rising at a 2.0 percent annualized rate. Energy prices fell 3.0 percent for the month (not annualized), reflecting in part a 6.4 percent decline in the price index for gasoline and other motor fuel. Food prices were essentially unchanged.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.5 percent in May, following a 1.7 percent annualized rate in April.

The 12-month trimmed mean inflation rate held steady at 1.7 percent for a third consecutive month. The 12-month headline inflation rate declined to 1.4 percent from 1.7 percent, while the 12-month inflation rate for PCE excluding food and energy ticked down to 1.4 percent from 1.5 percent.

Gasoline Prices Weigh on Headline Inflation Rate

The price index for gasoline (and other motor fuel) fell 6.4 percent in May, in line with our expectation in last month’s Inflation Update. Gasoline subtracted roughly 1.6 annualized percentage points from May’s headline inflation rate, in the sense that a price index of all items apart from gasoline would have risen at an annualized rate of roughly 0.8 percent in May, rather than declining at the 0.8 annualized rate recorded by the all-items index.

Among other energy goods and services, the price index for fuel oil fell 2.8 percent, while the price indexes for natural gas services and electricity services rose 1.9 percent and 0.3 percent, respectively.

The price index for energy goods and services is up 5.3 percent for the 12 months ending in May. Over the same period, the price index for gasoline and other motor fuel rose 5.4 percent, the price index for fuel oil rose 11.9 percent, and the price index for natural gas services rose 13.9 percent. The price index for electricity services, which is generally much less volatile than the other major energy components, increased 3.0 percent.

The price index for gasoline and other motor fuel should show a further decline when PCE data for June are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track to decline roughly 1.6 percent in June. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for June—what we would expect given normal changes in supply and demand conditions—is roughly a 1.1 percent increase, making the DOE data consistent with a 2.7 percent seasonally adjusted decline. A drop of that size would subtract roughly 0.6 annualized percentage points off June’s headline inflation rate.

Food Prices Flat in May

After three monthly increases, food prices were essentially unchanged in May, rising less than 0.1 percent at an annualized rate.

Prices for less-processed items and more-processed items were both close to unchanged in May. The former, which had risen at an average annualized rate of 7.5 percent over the prior three months, fell at a 0.4 percent annualized rate in May. Prices for more-processed food items rose at an annualized rate of just 0.2 percent.

The price index for food as a whole is down 0.1 percent over the past 12 months, reflecting a 0.7 percent decline in the prices of less-processed items and a 0.1 percent increase in the prices of more-processed items.

Core Goods Prices Decline Again

Prices for core goods fell in May, declining by an annualized 2.6 percent. This follows annualized declines of 4.1 percent and 2.4 percent in March and April. The decline over the three months—an average annualized 3.0 percent—is the steepest for any three-month period since March–May 2003.

Among core goods, the price indexes for women’s and girls’ clothing (down an annualized 16.7 percent) and jewelry (down an annualized 28.7 percent) had the biggest negative impacts on headline inflation, combining to subtract about 0.4 annualized percentage points off May’s headline rate. At the other end of the spectrum, the price index for prescription drugs rose at an annualized rate of roughly 4 percent and added about 0.2 annualized percentage points to May’s headline inflation rate.

For the 12 months ending in May, prices for core goods are down 0.7 percent; they had been down 0.6 percent on a 12-month basis through April.

Prices for core services, meanwhile, rose at a 2.0 percent annualized rate in May. This follows a 3.0 annualized increase in April. Outsized declines were recorded by the price index for the final consumption expenditures of nonprofit institutions serving households (down an annualized 7.3 percent) and the price index for air transportation services (down an annualized 22.0 percent). The two service components combined to subtract about 0.3 annualized percentage points off May’s headline inflation rate. The price index for financial service charges, fees and commissions rose at a 14.7 percent annualized rate and contributed roughly 0.3 annualized percentage points to May’s headline inflation rate.

Our “big three” price index—aggregating three of the largest and least-volatile components of core services: rent, owners’ equivalent rent (OER) and the price of dining out—rose at a 2.7 percent annualized rate in May, down from a 3.0 percent rate in April. Individually, rent rose at a 4.2 percent annualized rate, OER rose at a 2.4 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 2.3 percent annualized rate.

For the 12 months through May, the big three index is up 3.2 percent, down 0.1 percentage points from its increase for the 12 months through April. The price index for core services as a whole rose 2.1 percent for the 12 months ending in May, also down 0.1 percentage points from the index’s 12-month increase through April.

—Jim Dolmas
June 30, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update